Stocks and volatility looked confused today, while the VIX futures barely moved. Stocks opened higher on what seemed like a resolution that may have opened up a larger can of worms in Cyprus, then sold off in what seemed like blazing speed compared to the movement we’ve seen in the indices over the past 3 months.
How would you like to have your money in a bank, see it lose 30-40% overnight, then know that you can’t take it out anytime soon? What would you do if you could remove it? How are they going to open the banks? If you are pondering these things, real depositors over there are doing the same thing.
So, stocks rejected higher price and then rejected lower price in the same day. The VIX opened 10% lower, and subsequently surged to over 14.50 in a little over an hour.
VIX Volatility Index values generated at: 03/25/2013 14:59:43
|Trade Date||Expiration Date||VIX||Contract Month|
|3/25/2013 2:59:43 PM||13.66||1|
|3/25/2013 2:59:43 PM||14.30||2|
|3/25/2013 2:59:43 PM||15.18||3|
|3/25/2013 2:59:43 PM||15.94||4|
|3/25/2013 2:59:43 PM||17.03||5|
|3/25/2013 2:59:43 PM||18.28||6|
|3/25/2013 2:59:43 PM||18.38||7|
|3/25/2013 2:59:43 PM||18.87||8|
|3/25/2013 2:59:43 PM||19.92||9|
|3/25/2013 2:59:43 PM||21.20||10|
It’s important to look at the VIX term structure occasionally, and I intend to highlight this more often in this space. The top chart instant online payday loans shows the actual S&P option VIX values that comprise the VIX on a rolling basis, while the bottom graph are the futures term structure. On April 12th, one week before OPEX, the VIX will be all May, as it rolls one week early. It also will assign a negative value for June during OPEX week to balance that out.
So we are two weeks into rolling into May, and that weighting gets heavier every day. The May futures are pricing in 10% higher volatility for that cycle. Last year, May VIX crossed 25. And VIX was hovering around 14 on March 23rd, so you can see what can happen in a hurry during historically weak months for stocks.
Of course, just because May has been rocky, many of you will say it won’t happen this time around. Maybe so, but seasonality of the markets should be respected.
Closed April $18 VXX puts early this morning for a 47% gain, selling at .28 with a basis of .19. We now look to May puts if we decide to short volatility with the VXX on VIX spikes.
Still long VIX 14, VXX 20 and 21 all for April.
A churning week as profit takers and late bulls are on opposite sides. Deep selling is probably not in the cards yet, although with our positioning, that would be welcome. After the first couple days of April, things could get interesting. April was unkind last year.